Strategy: 3x leveraged Universal Investment Strategy

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This topic contains 58 replies, has 25 voices, and was last updated by  Alexander Horn 1 year, 3 months ago.

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  • #48230

    R D HATHCOCK
    Participant

    I am also using a group consisting of UDOW, TQQQ and SPXL, and having the software nominate what is invested. I require 10% minimum in each of the 3, and hedge with TMF using the structure (lookback, etc.) as UIS3X.

    From Morningstar the rough % composition of the unleveraged ETF’s is:
    Item – QQQ – SPY – DIA
    Fin. – 1 – 17 – 20
    Ind. – 4 – 11 – 23
    Tech. – 58 – 21 – 14
    #1 Hdlg AAPL{12) AAPL(4) BA(8)

    Does anyone have any thoughts on this?

    #48320

    Deshan Woods
    Participant

    [quote quote=48218]Nice job Deshan!! I wish I would have found LI during my earlier years where I could have taken the risks you did….Would have been nice to have been retired by now….As it is, I will have to wait about 4 more years(52) until I can officially relax. I tried creating a spreadsheet something akin to yours…I had limited success so I ended up staying with just a basic version. I wonder what the difference in Std Dev is between using SPXL and TQQQ is in the “3X” strategy….. I assume you have a nominal portfolio with LI and that the 3X strategy is just a small piece??? I currently employ 10% each to MYRS and 3X UIS….i might look into the TQQQ though.. thanks Bama

    [/quote]

    I’m fully invested in the 3x strategy. I’ve already taken out my initial investment and am purely riding on the profits. With my pension and low debt, I figure I can take the risks. One thing I’ve learned is that this strategy has beaten everything else I can find except for some XIV/VXX volatility strategies that cost way more to subscribe to and basically alternate between the two. Over the past 2 years, those strategies have really outperformed, but I feel more comfortable here with LI and the wisdom of the team.

    When compared to my mutual fund investing since the early 90s, no comparison. I’ve made more in past 3 years than my whole investment journey 20 years prior. That’s frustrating. Can’t get that time back and to know I paid all those fees to underperform the market.

    I have a long term goal and plan to stay faithfully focused to the emotion free monthly rebalance indicators.

    #49901

    Deshan Woods
    Participant

    [quote quote=48230]I am also using a group consisting of UDOW, TQQQ and SPXL, and having the software nominate what is invested. I require 10% minimum in each of the 3, and hedge with TMF using the structure (lookback, etc.) as UIS3X.
    From Morningstar the rough % composition of the unleveraged ETF’s is: Item – QQQ – SPY – DIA Fin. – 1 – 17 – 20 Ind. – 4 – 11 – 23 Tech. – 58 – 21 – 14 #1 Hdlg AAPL{12) AAPL(4) BA(8)
    Does anyone have any thoughts on this?
    [/quote]

    Looks like you have all three working for you and UDOW has surprisingly outperformed tech recently. I had a 50 50 spilt between SPXL and TQQQ for awhile but just TQQQ right now.

    #50586

    StefanM
    Participant

    Hi LI team,

    In this month’s (March 2018) Investment Outlook, it states “We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels. Leveraged ETFs are ‘path dependent’ and may not perform as well in volatile sideways markets.”

    If we are to rotate out of 3xUIS (and into 1xUIS), can you please kindly confirm how you would determine when it is recommended to re-enter into 3xUIS and that the subscriber community would be informed of that change in the volatility environment.

    Additionally, it may be helpful to remodel the 3xUIS strategy in QT to identify the impact of moving between 3xUIS and 1xUIS at various volatility levels.

    Thanks.

    #50610

    Deshan Woods
    Participant

    [quote quote=50586]Hi LI team,
    In this month’s (March 2018) Investment Outlook, it states “We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels. Leveraged ETFs are ‘path dependent’ and may not perform as well in volatile sideways markets.”
    If we are to rotate out of 3xUIS (and into 1xUIS), can you please kindly confirm how you would determine when it is recommended to re-enter into 3xUIS and that the subscriber community would be informed of that change in the volatility environment.
    Additionally, it may be helpful to remodel the 3xUIS strategy in QT to identify the impact of moving between 3xUIS and 1xUIS at various volatility levels.
    Thanks.
    [/quote]

    I’m scratching my head over this too. After all, isn’t this supposed to be emotion free investing using solid backtested strategies through various timeframes and market conditions?

    I understand that leveraged ETFs have a decay about them based on the article in the newsletter, but isn’t the point of rebalancing monthly supposed to curb that fear?

    Fearful or short term investors shouldn’t use this strategy, but I’m not fearful nor short term. I’ll take on the risk, that’s why I chose this one. I want the opportunity to beat the experts and the market as a whole which many say can’t be done.

    When I look back at past results, I see periods where the strategy shifted in time to avoid long term losses for the most part. No one can guarantee the future, but are you all afraid of this strategy going forward? I’m getting confused.

    #50622

    Invest
    Participant

    I´m a new subscriber i´m investing since some time but this is a little confusing one of the first thinks you learn is to stick to your strategy in thick and thin, or not? The graveyard low volatility level could also be over who knows for sure.

    #50628

    Vangelis
    Keymaster

    I guess the comment was vague and not worded correctly so let me try to clarify. This is not about wether the UIS or 3x UIS strategy will continue to perform as expected. Neither does it mean that one should rotate from one to the other. It has to do with which version tends to be more efficient at certain environments because of how leveraged ETFs work.

    Let’s take an example: Let’s say SPY is at a theoretical price of 100, SPXL (3x long) at a price of 100 and SPXS (3x short) is at a price of 100 . After fluctuating up and down, 1 month later SPY ends up back at 100. For reasons I will not get into here, SPXL will end up at around 97 (due to ‘tracking error’) and SPXS will end up around 95. The divergence is a function of how volatile (larger ups and downs) the moves are, the leverage of the ETFs (2x or 3x) and whether the leveraged ETF is an inverse one (bigger divergence for inverse). So if one is expecting a flat and volatile market and has the funds and access to short leveraged ETFs, the preference would be:
    a. Implement UIS by shorting SPXS and TMV and gain slightly from the tracking error (minus borrowing costs)
    b. Long UIS.
    c. Long 3x UIS (loose from the tracking error).

    The opposite happens when the market goes straight up (or down). If SPY ended up at 110 and every day was an up day (no ups and down) SPXL would end up at 140+ (ie gain of more than 3x the underlying). Th opposite is true also. If SPY were to ‘crash’ in a straight line, SPXL would crash more than 3x times.

    So 3xUIS is less efficient in a flat or falling market.

    This does not mean you would ‘rotate’ from one strategy to another. It just means that if you have enough funds and expect a correction or a flat market, it may be better to stay with UIS than use the 3x. Again, it is a minor comment. Normally the choice between the three version comes down to how much money is available to commit (ie 10,000 vs 500,000) and whether there is access to short 3x ETFs with cheap borrowing cost. I trade the inverse 3x’s, Frank enhances further by using options :)

    The bottom line is that UIS is a strategy that has worked in the past and hopefully will continue to do so. Whether you trade using 3x ETFs, shorting inverse ETFs or selling puts may bring some extra returns provided you have the time and energy to deal with these minor tweaks.

    #50631

    Deshan Woods
    Participant

    [quote quote=50628]I guess the comment was vague and not worded correctly so let me try to clarify. This is not about wether the UIS or 3x UIS strategy will continue to perform as expected. Neither does it mean that one should rotate from one to the other. It has to do with which version tends to be more efficient at certain environments because of how leveraged ETFs work.

    Let’s take an example: Let’s say SPY is at a theoretical price of 100, SPXL (3x long) at a price of 100 and SPXS (3x short) is at a price of 100 . After fluctuating up and down, 1 month later SPY ends up back at 100. For reasons I will not get into here, SPXL will end up at around 97 (due to ‘tracking error’) and SPXS will end up around 95. The divergence is a function of how volatile (larger ups and downs) the moves are, the leverage of the ETFs (2x or 3x) and whether the leveraged ETF is an inverse one (bigger divergence for inverse). So if one is expecting a flat and volatile market and has the funds and access to short leveraged ETFs, the preference would be:
    a. Implement UIS by shorting SPXS and TMV and gain slightly from the tracking error (minus borrowing costs)
    b. Long UIS.
    c. Long 3x UIS (loose from the tracking error).

    The opposite happens when the market goes straight up (or down). If SPY ended up at 110 and every day was an up day (no ups and down) SPXL would end up at 140+ (ie gain of more than 3x the underlying). Th opposite is true also. If SPY were to ‘crash’ in a straight line, SPXL would crash more than 3x times.

    So 3xUIS is less efficient in a flat or falling market.

    This does not mean you would ‘rotate’ from one strategy to another. It just means that if you have enough funds and expect a correction or a flat market, it may be better to stay with UIS than use the 3x. Again, it is a minor comment. Normally the choice between the three version comes down to how much money is available to commit (ie 10,000 vs 500,000) and whether there is access to short 3x ETFs with cheap borrowing cost. I trade the inverse 3x’s, Frank enhances further by using options 🙂

    The bottom line is that UIS is a strategy that has worked in the past and hopefully will continue to do so. Whether you trade using 3x ETFs, shorting inverse ETFs or selling puts may bring some extra returns provided you have the time and energy to deal with these minor tweaks.

    [/quote]

    Thanks for the clarification. It just seems that there could also be a signal to go to cash as well, like 20% xyz and 30% xyz 50% cash during periods described above but I remember Frank always saying cash isn’t a good investment.

    I also noticed that the #1 ranking ETF for the month was excluded from this month rebalance. Was this a mistake or did I read that wrong?

    Thanks for all you guys do. I really mean that.

    #50646

    StefanM
    Participant

    Dear Vangelis

    Thank you for your reply.

    Let me put my comment another way – having received the LI Investment Outlook last Thursday 1st March 2018, which stated ‘We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels’, I took it to mean that the LI team have discretionarily overridden the 3xUIS for very good reasons (the basis of such reasons were not explicitly stated) and as the Investment Outlook was silent on how to action or interpret such a recommendation, I took it to mean that any investment in 3xUIS should be closed and rotated into 1xUIS. I assumed the above Investment Outlook comment was borne from the LI team’s significant prior investing experience (being greater than mine).

    I duly sold my 3xUIS investment and realised a loss.

    I am concerned that the LI team can make such a strong comment such as appearing to recommend the overriding of a strategy and not expect subscribers to take some sort of immediate action in order to follow this recommendation. I feel that you are attempting to backtrack on the Investment Outlook commentary and not addressing the concerns raised in my initial comment above.

    To that end, I would therefore be grateful if you would please kindly answer the following questions (some of which are from my previous post):

    • How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?
    • That the subscriber community would be informed of that change/improvement in the volatility environment.
    • As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.
    • I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    I subscribed in January 2018 and placed an investment using the 3xUIS strategy, probably at worst time.

    I have not yet reinvested in 1xUIS (or 3x UIS as you seem to suggest that its still valid) as yet, as my confidence in the LI position on this strategy is somewhat shaken. Addressing the above questions will go some way to restoring my confidence.

    Separately, prior to investing into 3xUIS, I researched the downside of leveraged ETFs in range-trading and downward markets. Indeed, the LI Investment Outlook contained a link re-emphasising leveraged ETF risks.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I would appreciate a point by point reply to the above questions.

    Thank you.

    #50664

    Vangelis
    Keymaster

    Dear Stefan,

    We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

    How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

    You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

    That the subscriber community would be informed of that change/improvement in the volatility environment.

    We can post/email when this happens.

    As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

    This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

    I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I assume you mean this:
    “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

    This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

    #50710

    Deshan Woods
    Participant

    [quote quote=50664]Dear Stefan,

    We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

    How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

    You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

    That the subscriber community would be informed of that change/improvement in the volatility environment.

    We can post/email when this happens.

    As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

    This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

    I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I assume you mean this:
    “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

    This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

    [/quote]

    Thanks for clarifying. I just plan to stay true to the blue line express signals (3x UIS), rebalance and press on. Its done me well since 2014 and nothing has changed that. I expect bumps and bruises along the way and I have a 10 year time horizon and can take on these risks.

    Even when one enters at worst possible time, the strategy always seems to adapt and make rebounds. I will admit that the maximum yield strategy is looking good for entry now.

    #50766

    StefanM
    Participant

    Dear Vangelis, thank you for your helpful reply, I appreciate it.

    #51262

    Deshan Woods
    Participant

    [quote quote=50710]

    Dear Stefan,

    We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

    How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

    You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

    That the subscriber community would be informed of that change/improvement in the volatility environment.

    We can post/email when this happens.

    As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

    This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

    I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I assume you mean this:
    “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

    This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

    Thanks for clarifying. I just plan to stay true to the blue line express signals (3x UIS), rebalance and press on. Its done me well since 2014 and nothing has changed that. I expect bumps and bruises along the way and I have a 10 year time horizon and can take on these risks.

    Even when one enters at worst possible time, the strategy always seems to adapt and make rebounds. I will admit that the maximum yield strategy is looking good for entry now.

    [/quote]

    While we cannot ever know for sure the future, following the strategy signal paid off for March adding another 3% to my portfolio for the month. Had I not switched, I would have seen nearly 5% loss.

    Even with FED raising interest rates late into month, the 10yr rate, which everyone on TV predicted would rise above 2.9% and possibly take out 3% soon after, never occurred. Quite the opposite happened.

    It’s nerve racking to hold big positions in TMF when everyone is telling you that interest rates will rise. Since TMF has to fall lower under that scenario, you start second guessing everything. The fact is that no one knows anything for sure. Even with the FED .25% raise, the rate which briefly rose above 2.9%, didn’t hold and has now fallen below 2.75%.

    I know TMF and TLT aren’t based on the 10yr rate, but that metric is most closely tracked on TV and is an indicator on the short term 20 and 30yr rate direction as well.

    I still don’t quite fully understand these interest rates and how their trends are so easily predicted, but fool just about everyone doing so. Most articles posted here just focus on the correlation aspect between stocks and bonds so maybe that’s all I need to know or care about in this strategy, but I still scratch my head on why the experts can’t get it right when the obvious happens.

    #51328

    Alexander Horn
    Keymaster

    Agree with your comments, it´s a bit like a gigantic tug of war between two forces of wisdom:
    – Strong fundamental growth, inflation around 2% target, full employment, thus risk of inflation, thus more hikes anticipated
    – Maybe too high valuations (cracks in growth story), tax “goodies” aleady priced in, aggressive hikes might damage equity valuations, so FED probably careful, so maybe long-term yields already overshoot hike expectations. Plus yuuge rate differential between US and Japan/EU pulling money into US treasuries, thus keeping yields lower.

    Hard to tell how this is playing out, so keeping some treasuries is reasonable – especially as the now infamous short term correlation which broke down in recent months has been working better recently again.

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